Debt Contracts and Financial Intermediation with Costly Screening

Wang, Cheng; Williamson, Stephen D.

doi:10.2307/136203

Cited by 34 publications

(42 citation statements)

References 9 publications

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“…As a result, the equilibrium probability of screening has to increase in order to keep the incentive‐compatibility constraint binding. It should be clear from the explanation here that this result rests primarily on the condition that the equilibrium loan rate for a high‐risk borrower is higher than that for a low‐risk borrower – a rather robust feature of equilibrium contracts that is likely to hold both in theory and in practice (e.g., one can find this feature of contracts in Azariadis and Smith 1993; Bencivenga and Smith 1993; and Wang and Williamson 1998). Since screening leads to wasteful use of resources, to the extent that an increase in τ induces lenders to screen more frequently, a higher income tax will exacerbate the problem of asymmetric information.…”

Section: Equilibrium Loan Contractsmentioning

confidence: 81%

“…It stems from the observation that ex ante screening is arguably more important and more often practiced in the credit market than ex post verification. Theoretically, Wang and Williamson (1998) argue that the costly screening approach has another advantage over the costly state verification model in that debt contracts survive randomization as the optimal contracts in the costly screening model. In our framework, a separating equilibrium as in Rothschild and Stiglitz (1976) will emerge, and incentive‐compatible (debt) contracts can be offered so that borrowers are induced to self‐select.…”

Section: Introductionmentioning

confidence: 99%

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Public capital, asymmetric information, and economic growth

Yong²

2005

Canadian J of Economics

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We investigate the provision of public capital in an endogenous growth model with asymmetric information. In a credit market with costly screening, we show that the equilibrium contracts are characterized by the self-selection of borrowers. Through identifying an additional adverse effect of taxation on growth, we show that the optimal tax rate in our model is smaller than the output elasticity of public capital. Therefore, our analysis justifies a more conservative tax policy in the presence of asymmetric information. Furthermore, our model suggests a number of implications that appear to be well supported by preliminary evidence in cross-country data. JEL classification: D82, H21, O41Capital public, information asyme´trique, et croissance e´conomique. Ce me´moire examine la fourniture de capital public dans un mode`le de croissance endoge`ne quand l'information est asyme´trique. Dans un marche´du cre´dit ou`le tamisage est couˆteux, on montre que les contrats en e´quilibre sont conforme´s par l'auto-se´lection des emprunteurs. Par le truchement de l'identification d'un effet additionnel ne´gatif de la fiscalite´sur la croissance, on montre que le taux d'imposition optimal dans le mode`le est plus petit que l'e´lasticite´du produit par rapport au capital public. En conse´quence, l'analyse montre qu'une politique de taxation plus conservatrice est de´fendable quand il y a asyme´trie de l'information. De plus, le mode`le sugge`re un certain nombre de propositions qui semblent bien supporte´es par les re´sultats pre´liminaires d'une analyse transversale de donne´es pour plusieurs pays.We are indebted to two anonymous referees for valuable comments and suggestions that have greatly improved the paper. We also wish to thank Nan-Kuang Chen, Charles Leung, Ping Wang, and participants at the Second Biennial Conference of Hong Kong Economic Association, December 2002, for helpful feedback and comments. Of course, the usual disclaimer applies.

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Section: Equilibrium Loan Contractsmentioning

confidence: 81%

Section: Introductionmentioning

confidence: 99%

Public capital, asymmetric information, and economic growth

Yong²

2005

Canadian J of Economics

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“…The purpose of our analysis is to offer an alternative explanation of stock market development by appealing to a different, but equally plausible, form of informational friction that relates to borrowers' actions in determining project outcomes. In doing this, we pay heed to the view held by many analysts that, in practice, it is the ex ante, rather than the ex post, costs of acquiring information that matter most to lenders (Wang and Williamson, 1998). An implication of our model is that lenders could, in principle, execute loan repayments through a system of contingent claim contracts based on observed project yields.…”

Section: The Economymentioning

confidence: 99%

Financial Development, Financing Choice and Economic Growth

Blackburn

Bose

Capasso

2005

Rev Development Economics

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In an overlapping generations economy, households (lenders) fund risky investment projects of firms (borrowers) by drawing up loan contracts on the basis of asymmetric information. An optimal contract entails either the issue of only debt or the issue of both debt and equity according to whether a household faces a single or double enforcement problem as a result of its own decision about whether or not to undertake costly information acquisition. The equilibrium choice of contract depends on the state of the economy which, in turn, depends on the contracting regime. Based on this analysis, the paper provides a theory of the joint determination of real and financial development, with the ability to explain both the endogenous emergence of stock markets and the complementarity between debt finance and equity finance.

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“…to reduce the cost of raising funds up to its lowest level : this is obtained when = 0 and/or W = R. Consider the valuesĉ andc which appear respectively in (26) and (27). After substituting = 0 and/or W = R intoĉ andc, inequality (28) solvesĉ c.…”

Section: On the Elimination Of The Credit Crunchmentioning

confidence: 99%

“…The issue of government support in credit provision with …nancial informational frictions has been studied by DeMeza and Webb (1987), Innes (1991) and Hellmann and Stiglitz (2000), inter alii. Williamson (1994) and Wang and Williamson (1998) consider public intervention which eliminates information asymmetries caused by costly state veri…cation. On the other hand, the positive e¤ect of external mediators has been initially examined by Myerson (1986) and Forges (1986) in communication games.…”

Section: Introductionmentioning

confidence: 99%

Credit Availability in the Crisis: Which Role for the European Investment Bank Group?

2010

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In this paper we consider a moral hazard problem between a creditworthy …rm which needs funding and a bank. We …rst study under which conditions the …rm does not obtain the loan. We then determine whether and how the intervention of an external …nancial institution can facilitate the access to credit. In particular, we focus on the European Investment Bank Group (EIBG), which provides (i) speci…c credit lines to help banks that …nance small and medium-sized enterprises (SMEs) and (ii) guarantees for portfolios of SMEs'loans. We show that only during crises the EIBG intervention allows to totally overcome the credit crunch.

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Debt Contracts and Financial Intermediation with Costly Screening

Cited by 34 publications

References 9 publications

Public capital, asymmetric information, and economic growth

Public capital, asymmetric information, and economic growth

Financial Development, Financing Choice and Economic Growth

Credit Availability in the Crisis: Which Role for the European Investment Bank Group?

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